Given how complicated our government has made the rules and regulations around Social Security, there’s many misconceptions and myths about surrounds benefits. Here’s some actionable tips and strategies to help you cut through the noise and make progress on your path to financial independence.
Social Security should be closely managed like other assets.
Many people will have large IRA and/or 401(k) balances heading into retirement, and they’ve implemented all sorts of financial planning and asset management strategies for decades, like maximizing returns and minimizing expenses. Few young people think of their future Social Security income as an asset that should managed and maximized, but they should. There are different strategies and techniques that young people should consider to help them maximize their retirement benefit.
Retiring early has its drawbacks.
Since the Social Security formula considers your 35 highest earning years, retiring early will negatively impact the formula if you haven’t reached 35 years yet. Penalizing early retirees even more is that each of the 35 years used are adjusted to today’s dollars, but the inflation-adjusted maximum earnings numbers are higher for more recent years than years far in the past.
To maximize your social Security benefit, you’d have to minimize the time period between retiring from work and collecting the benefit. Once you’ve put in 35 years though, the benefit of continuing to work gets smaller.
Social Security will likely be altered, but won’t go away completely.
According to the 2018 Trustees report, the Social Security trust, which had $2.9 trillion at 12/31/2017, is fully funded until 2034. After that, Social Security has enough money to continue to support only 77% of benefits, decreasing to 74% coverage by 2092.
To make up the difference, some of the proposals include increasing the maximum income that’s subject to Social Security tax ($128,000 in 2018), raising the full retirement age (67 for people born after 1960), reducing Cost of Living Adjustments (COLA) for all retirees, or lowering benefits. The 2017 report estimates that it would take a 3% increase in payroll taxes to bring Social Security back to a fully funded level.
Social Security income is more valuable than you think.
Many people are dismissive of Social Security given that their current earnings are far larger than their expected Social Security benefit. This is a mistake since every dollar you earn in Social Security is much more valuable than a dollar of regular income, because 1) Social Security is not subject to payroll taxes; 2) Social Security is tax-free income for many people; 3) your lifestyle expenses might be much lower when you receive Social Security; 4) you’ll no longer need to make retirement savings contributions when you receive Social Security; and 5) you’ll (ideally) have few debts to pay off when you receive benefits.
Social Security penalizes you for working in retirement.
Since the Social Security calculation takes into account the highest earning 35 years, it’s possible to replace some of the lower earning years by working while taking Social Security benefits. On the other hand, Social Security benefits are withheld over certain income ($1 of benefits are withheld for every $2 you earn over $17,040 in 2018), which deters some people from working. The good news is that these reductions stops when you hit Full Retirement Age (FRA).
Divorced spouses can potentially get a divorced spouse benefit.
For marriages that lasted longer than 10 years, the lower earning spouse may be able to benefit from the income earnings of their former spouse. There are very specific rules that govern which divorced spouses are eligible, but many divorced couples are unaware of this benefit. The benefits paid to the lower income spouse don’t affect the higher earning spouse.
Your Social Security statement is probably inaccurate.
The statement you get from the Social Security Administration is just an estimate of your benefits if you continue to work. Your actual benefit could be much higher or lower, depending on if you continue to work or not. The benefit on your statement is the FRA benefit, calculated at 62, but you still continue to earn Cost of Living Adjustments (COLA) until FRA; and COLA credits if you wait until 70. As well, you’ll want to see if the historical earnings on your statement are accurate. If it’s missing some of your earnings, you could receive a benefit lower than what you’re entitled.
People should generally think of Social Security as longevity insurance.
When it comes to deciding when to take Social Security, the worry I most often hear is “what if I delay taking Social Security and I die early?” This is definitely a valid concern since most people don’t want to leave money on the table. A bigger concern is not having enough money in retirement if you live longer than expected. Since Social Security greatly rewards those waiting until FRA or later with COLA and delayed credits of 8% per year, most people are actually losing out on money if they take it early. Basically, delaying taking the benefit guards against getting poor in old age.
Your decisions about Social Security affect your spouse.
Many people decide when to take their benefits without realizing that their decision can affect their spouse for decades. Spouses with a higher income partner can earn a spousal benefit, but that benefit is based on when the higher earning spouse started taking their benefit, with the benefit being much lower if it’s taken before FRA.
Also, widow benefits are determined based on the age the deceased takes Social Security and the age the widow takes Social Security. A widow of a higher income earning spouse is far more likely to not run out of money if the deceased waited to FRA or later to take social security benefits.
Small business owner Social Security strategies can backfire.
Some advisers advocate for business owners not taking a salary to proactively pay themselves or a spouse wages to earn a Social Security benefit in the future. Given that business owners paying themselves would have to pay 12.4% up to the max earnings ($128,,400 in 2018) and 2.9% in Medicare taxes on all earnings, the break even age for these strategies to pay off could be at ages over 100. As an employee, you’re only liable for half of these taxes, so taking a job just for future benefits can make more sense than for a business owner.
David Flores Wilson, CFP®, CFA, is a New York City-based Senior Wealth Advisor at Watts Capital. He can be reached at firstname.lastname@example.org.
The Tax Cuts and Jobs Act of December 2017 was the most significant tax reform in decades. And while the business media has covered extensively the new tax bracket changes, the lower C corporation tax rate, and the Section 199A Qualified Business Income (QBI) deduction for pass-through businesses, most people aren’t aware of large potential investment tax breaks created through the creation of Qualified Opportunity Zones (QOZ). These QOZs allow investors to potentially garner some or all of three different significant tax breaks: capital gain deferral, capital gain reduction, and capital gain elimination.
The new QOZ program aims to promote economic growth and job creation by unlocking capital in low basis investments. The program allows an investor to roll any capital gain (real estate, stocks, bonds, mutual funds, ETFs) into an fund, partnership or corporation that invests 90% of the funds in property in the qualified opportunity zones.
Three Different Tax Breaks
For investors that meet initial and ongoing compliance regulations, and invest their capital into Qualified Opportunity Zone areas, there are up to three distinct tax breaks available to them:
Deferral of an unlimited amount capital gains if the gain is invested within 180 days into an qualified opportunity zone fund (QOF). Taxes on the gain are due in 2027 or when the opportunity zone fund is sold, whichever is earlier.
A reduction by 10% of their capital gain if the fund is held for 5 years, and a reduction of the capital gain of 15% if the fund is held for 7 years.
Investors get to shield additional gains from taxation completely if they hold on to the opportunity zone fund investment for 10 years.
The tax savings in dollar can be substantial. For example, if an investor with a $500,000 property with a basis of $100,000 sold the property and bought a second property with the after tax proceeds, they would have $685,000 (up 37%) in 10 years once they sold the second property, assuming a 20% capital gains rate and a 6% rate of return. If they sold the property and purchased an opportunity zone fund investment, they would have $827,000 (up 65%) after-tax after 10 years, assuming the same rate of return and capital gains rate.
What are Opportunity Zones?
After evaluating 2010 census tracts with poverty rates of at least 20% (the national average is around 17%) or median income no more than 80% of the surrounding areas, the Governors of the States and territories were able to nominate up to 25% of the qualifying areas. There are around 8700 opportunity zones nationwide. Investors can receive tax breaks if they develop, significantly upgrade property, or fund a startup business within the opportunity zone.
Opportunity Zone Funds May Be an Alternative to a 1031 Exchange
Opportunity Zone Funds are most appropriate for people that have large stock capital gains or large real estate gains and are looking sell those holdings. Real estate investors may want to consider the pros and cons of a QOZ versus a 1031 exchange. A 1031 allows an investor to defer capital gains indefinitely by rolling the principal and gain into a new property. A QOZ on the other hand allows the real estate investor to defer the capital gain for up to 7 years by reinvesting just the gain portion of the investment, but gives the investor access to their principal.
Using a QOF to Diversify your Investments
Opportunity Zone Funds can allow real estate investors the ability to diversify their stock or real estate holdings. To get diversification, one alternative would be to roll the gain from selling the undiversified single stock position or single property into a diversified fund of opportunity zone projects through a Real Estate Investment Trust (REIT) structure. Several large REIT and private equity providers, including Sky Bridge Capital, have recently launched REIT funds to meet demand. These structures, typically only available to “accredited investors,” are easier to implement as they allow the investor to avoid the process of identifying and developing a stand-alone opportunity zone project.
Business owners that sold a company may also want to consider Opportunity Zone Funds so that they can defer or eliminate the hefty tax bill.
Potential Risks of QOFs
It’s worth noting that investors should be wary of having the tax benefits be the driving force of any investments. Like any real estate investment, there are a number of risks: the underlying investment with the QOF could go south, investments in QOFs are illiquid, Congress could potentially change the tax laws, QOFs involve significant monitoring and compliance paperwork, and QOFs incur taxable income in 2027 even if you continue to hold the investment. Before moving forward with a QOF investment, it’s important to talk to your CPA about implementation steps, filing requirements, and tax considerations, and your financial advisor to think through the investment makes sense for your overall financial plan.
As well, there isn’t substantial amount of time available for investors to get invested to get the maximum tax benefits. Given that this tax incentive expires on 12/31/2026, investors would have to be invested by 12/31/2019 to receive the maximum benefits of the 7-year gain reduction.
David Flores Wilson, CFP®, CFA, is a New York City-based Senior Wealth Advisor at Watts Capital. He can be reached at email@example.com.
Long-term trends show that divorce is increasingly expensive, time-consuming, and more frequent with divorce rates ranging from 40% to 50% depending on the state and age of the couple. We’ve all seen clients, friends, or family financially and emotionally decimated from going through a divorce. Oftentimes, one or both of the divorcing couple aren’t aware of the financial implications of the divorce settlement. Understanding the financial implications of divorce can make an already emotionally difficult situation easier to navigate. Here are some financial issues to consider for anyone going through a divorce.
Inventory assets, liabilities and income immediately.
If you’re thinking about getting a divorce, you’re going to want to gather documentation on both spouses’ income and assets as soon as possible. If the divorce becomes acrimonious, getting a hold of the documentation might become exponentially more challenging. The document collection should include tax returns from the last five years, bank and brokerage statements, real estate and business appraisals, employee benefits documents, Social Security Administration reports, and personal items like jewelry and safety deposit items. Don’t forget about unique assets like frequent flyer miles, deferred compensation, art, and collectibles. Ideally, you’ll develop an accurate family balance sheet and income statement that can be used in settlement negotiations.
Find Hidden Assets.
If you suspect your spouse may be hiding assets, you may want to enlist your CPA and/or financial advisor in looking for clues on tracking the assets down. For example, depreciation on Schedule C of the tax return can reveal real estate assets that may not have been disclosed and page three of a Social Security shows historical income. Keep in mind tax returns won’t show assets like annuities, cash value life insurance, and qualified plans that aren’t in distribution yet. A detailed review of cancelled checks, bank statements, W2s and 1099s can document assets that your spouse may not be forthcoming with. Your spouse may deny the asset exists or claim the asset was lost, but you should also be aware that there are also more esoteric ways of hiding assets like creating a false debt or transferring assets to a third party. Again, doing an inventory of marital assets early on can lower the chance of that happening.
When a spouse whose marriage is on the rocks has little knowledge of the other spouse’s finances, it might make sense to consider filing married or filing separately. This could likely result in higher tax liability, but this would lower exposure to liability if the IRS issues a notice of deficiency. Both parties are responsible for tax debts on joint tax returns unless one spouse qualifies for innocent spouse regulations.
Understand the tax implications of each asset
As each party negotiates dividing the marital assets, one of the biggest mistakes is not considering the tax consequences of each asset. For example, $1000 in a bank account is not the same as $1000 in an IRA, given that a withdrawal from an IRA would be taxed at ordinary income tax rates and possibly a 10% early withdrawal penalty, while the cash withdrawals wouldn’t be taxed. Likewise, $1000 in brokerage assets would likely be less valuable than $1,000 in a bank account, since the brokerage assets could have a cost basis much lower than $1,000 and it would be subject to capital gains taxes. It’s important to analyze each asset and take into account the tax consequences of the asset so you can view the investments apples to apples as you’re negotiating the settlement. Keep in mind that transfers between former spouses aren’t taxable, since IRS Section 1041 allows transfers to be tax-free between former spouses within one year of finalizing a divorce or within six years if it’s spelled out in the divorce agreement.
Carefully address unique assets in negotiations
There are a whole host of other division of asset issues that trip up divorcing couples, and being aware of them before the divorce settlement is finalized can save headaches down the road. Private investments are particularly troublesome since stock in privately held businesses is typically difficult to value and even harder to convert into cash. A lot of attention and analysis should be paid to dividing up retirement plans. The transferring requirements and process for calculating the value of retirement plans are different, whether it is a 401(k), IRA or defined benefit plan.
Some assets are just worth more to one party than the other. For example, Incentive Stock Options (ISOs) convert to non-qualified stock options (NQSOs) and lose their favorable tax treatment when they are transferred from one spouse to another.
Produce a pro-forma balance sheet
During settlement negotiations, we recommend modeling out any proposed asset division on a static and pro-forma basis. For example, if one spouse received a home and the other received securities, it's helpful to see what each party’s assets would look like five or ten years from now taking into account expected rates of return and tax differences.
Given the rapid growth of ownership of crypto currencies and their anonymous nature, it probably makes sense to have special clauses in the divorce settlement agreement that address this. The IRS has a heightened focus on crypto currencies, and is now focusing on transactions over $20,000. It makes senses to have documentation that addresses what would happen if previously undisclosed crypto assets are discovered and how those should be divided up.
Tread carefully on plans to sell the marital home.
For most families, their home is their largest asset, and so typically is the biggest point of contention in divorce settlement negotiations. Selling the home might be a good option for divorcing couples as they divide the marital assets, but selling could be troublesome for a number of reasons. The children are already going an emotionally difficult time with their parents getting divorced, so adding a move out of their home probably escalates the negative emotional impact of the divorce. As well, selling a home incurs large transaction costs during an already expensive divorce process. Even more, selling during a market downturn could make a potentially financially devastating process even worse. In cases where the value of the home is less than the mortgage, a short sell is an option, which could negatively impact your credit, although the credit impact of a short sale would be far better than a foreclosure.
Evaluate the pros and cons of one spouse retaining the home.
Some couples negotiate for one spouse to retain the home, while retaining the couple’s original mortgage. Before choosing this option, a thorough rent versus buy analysis should be done, so that the financial pros and cons of owning a home are thoroughly vetted. If there’s enough equity in the home and not a lot of non-home assets to divide up in a settlement, a home equity line can be used to allocate marital assets. Retaining the original mortgage can be problematic since both spouses are responsible for the mortgage from the lender’s perspective. When one spouse quitclaims their interest in the home to the other spouse, they essentially are relinquishing their benefits and rights to ownership while still being liable for the home’s debt.
Refinancing the original mortgage is a preferred solution when one spouse retains the home, but there are some potential issues to consider. Homeowner spouses may not have enough income to pay for the home themselves long-term. Moreover, qualifying for a mortgage after a divorce could be challenging after the financial effects of a divorce, particularly for the lower income-producing spouse. Lenders will closely scrutinize sources of income, including alimony and child support. The non-homeowner spouse should insist that his or her be removed from the mortgage to protect their credit.
Determine if continuing to jointly owning the home may be beneficial
There could be benefits of continuing to jointly owning the home for a limited time before a future sale of the house. This option could allow for less disruption in home life for the children. As well, there are potential tax savings from maximizing the use of the $500,000 capital gains exclusion for couples. If one spouse were to take sole ownership of the home and sell, they would only get $250,000 in capital gain exclusion.
A divorcing couple’s debt can present some tricky financial issues to navigate. The simplest way to deal with debt is to allocate liquid funds and pay off the debt once the divorce has been finalized. The agreement should be very specific on who pays the debt and when. Yet, just because one spouse is supposed to pay the debt after the divorce, doesn’t mean the creditor or credit card company won’t try and come after the other spouse if payments aren’t being made. Likewise, if one spouse files for bankruptcy before, during, or after a divorce, creditors might still come after the spouse that didn’t even file bankruptcy. Moreover, the property settlement that the non-bankruptcy filing spouse negotiated could be at risk since property settlements can be discharged in a bankruptcy. However, spousal support and child support can’t be discharged in bankruptcy.
Know your Options for Alimony regarding New Tax Laws.
The TJCA will have a significant financial impact on divorces finalized after December, 31, 2018 since alimony is no longer deductible for the payer and alimony income no longer taxable to the receiver after that date. For couples going through a divorce now, the higher earning spouses are incentivized to finalize the divorce before the end of the year, while the lower earning spouse is incentivized to delay finalizing the divorce until 2019. For pre 2019 divorces that are modified in 2019 or later, the couple can elect to have the post-2019 or pre-2019 alimony rules apply, but they should specify in the documentation which.
For divorces finalized after 12/31/18, the new tax laws eliminate the need for recapture calculations, which were designed to avoid property settlements being disguised as deductible alimony payments. Also, the need to write separate checks for alimony and child support largely goes away under the new tax laws, since both alimony and child support aren’t deductible under the new rules. Find out more about alimony in your state.
Prepare for Child Support.
Unlike alimony, each state has its own child support guidelines that determine the amount of child support that’s paid. In addition, there are upper income limits for the child support guidelines, and parties will have to negotiate the support level if they are above those income limits. In general, child support takes into account the amount of time the child will spend with each parent, the expected income for each parent, and the amount of spousal support. So as spousal support increases, the amount of child support decreases.
As time goes on, the court can always modify child support since their primary aim is to protect the children. Even if couples decide on their own to cease child support, it’s up to the Courts to ultimately decide. For tax purposes, child support is neither deductible for the payor nor included in income for the receiver.
Don’t Forget Social Security Considerations.
While Social Security isn’t a marital asset that can be divided after a divorce, there are some divorce-related considerations. Spouses that have been married for more than 10 years can choose to take the higher of either their own Social Security benefit or 50% of their former spouse’s benefit. When a spouse chooses to take their spouse’s benefit, the ex-spouse’s benefit level is unaffected. As well, the retirement age of spouses are not connected: One spouse can take their benefits at age 70, while the other takes theirs at 62. Widow benefits are available at age 60, but only if he or she does not get remarried before age 60. A widowed person in their late 50’s may want to consider delaying a marriage to maximize their benefits.
Analyze your Health and Life Insurance.
Non-working spouses should carefully analyze their insurance options when negotiating the divorce settlement. The non-working spouse could negotiate remaining on the working spouse’s health insurance, use COBRA to pay for the health insurance up to the three year maximum, or pay for insurance on the open market with alimony or settlement assets. COBRA has its drawbacks, as health insurance is only available for companies over 20 employees, and the insured can be dropped from coverage if payments are missed. If going the COBRA route, the non-working spouse could have issues getting affordable health care once the three year period ends, so perhaps the non-working spouse might want to get private insurance immediately after the divorce until Medicare kicks in at age 65.
It’s advisable to get life insurance on the alimony-paying spouse to replace alimony payments if he or she were to pass away before payments end. To make sure payments are actually made and coverage doesn’t lapse, the alimony recipient should directly make the insurance payments. Using term insurance over whole life insurance for the duration of the spousal support would help bring costs down. Since sometimes there are issues with underwriting life insurance coverage, it’s probably a good idea to have the insurance finalized before the divorce is finalized. That way the settlement can be renegotiated if insurance on the alimony isn’t possible.
Know the Facts Regarding the New Tax Law and Divorce.
Divorce essentially becomes more expensive and incrementally financially damaging to the household under the Tax Cuts and Jobs Act (TCJA) particularly when it comes to alimony. In the past, the higher earning spouse in the higher income bracket would get a deduction and the receiving spouse in the lower tax rate would pay taxes. For example, $10,000 in alimony from a 35% bracket spouse to a 15% bracket spouse would result in $2000 in tax savings to the overall household ($3500 in a deduction for the payor and $1,500 in tax for the receiver); that’s $2,000 more in taxes under the new rules. Since the new rules won’t go in effect until 2019, couples will likely take longer to negotiate alimony and add costs to an already expensive process. Child support will remain non-deductible under the TCJA.
Moreover, couples also lost the few deductions related to divorce. Tax fees and legal fees related to receiving alimony used to be deductible under miscellaneous itemized deductions in Schedule A and are no longer are deductible. On the other hand, the child tax credit is increasing from $1,000 to $2000 and more people are eligible with the much higher income limits. It’s likely to be an even more important bargaining chip going forward. And while the TCJA eliminated claiming exemptions for dependents, divorce agreements may still want to address them since the new tax law suspended them only through 2025.
Couples may also want to consider giving the lower earning spouse IRA and 401K assets over alimony payments. Since alimony won’t be deductible and distributions from retirement are taxable, the lower income spouse will pay a lower tax rate on distributions. The household pays less taxes overall under this strategy.
And while the TCJA gives some relief on the tax brackets for divorcing couples, and divorcing couples of course will no longer be subject to the “marriage penalty” of a married couple having a higher marginal tax rate than filing as single, home ownership is incrementally more challenging under the new tax law. Less of a mortgage is deductible ($1MM to $750,000) and the $10,000 SALT tax deduction makes a thorough ‘buy versus rent’ analysis even more important.
Understand the Impact of Divorce on College Financial Planning.
Oftentimes college financial planning isn’t addressed in divorce negotiations, and this is a big mistake. We recommend spelling out in the divorce agreement as many of the college funding and college financing issues as possible. Which spouse is responsible for paying for college and for what costs in particular will they cover? How many semesters will they cover and up until what age? Are payments dependent on academic requirements?
Clearing up the answers to these questions can avoid conflict and confusion later on. The reality is that the proper planning in this area often times doesn’t get addressed given that the parties are at odds during this time.
Maximize Financial Aid for your Children after Divorce.
Proper coordination and planning can help children of divorced parents maximize college financial aid. For the FAFSA, only the custodial parent, which is the parent that the child spends the majority of the year with, reports their income and assets. Note the custodial parent has nothing to do with which parent claimed the child on their tax return as a dependent. CSS schools on the other hand look at income and asset data from both the custodial and non-custodial parents. If parents split time with the child equally, it may make sense to tip the scales and designate the less financial secure spouse as the custodial parent to maximize financial aid.
Good college financial aid strategy could mean the custodial parent receiving more of the home and less alimony, or perhaps timing the receipt of alimony outside of years that affect Effective Family Contribution (EFC). Many divorce settlements set up education trusts for college education, but this can backfire down the road since these accounts are classified as student assets and are penalized heavily under the financial aid formulas. Likewise, if the child has assets in a UTGA or UGMA account, you may want to transfer those funds into 529s to get them assessed as parental assets, or you can simply spend that money on college expenses before other funds. Perhaps it makes sense to spend the UTMA/UGMA money ahead of college on tutoring or computers.
Some careful thought should be done around funding college expenses with 529 plans. You want the non-custodial parent to hold this asset to minimize its impact on the financial aid formulas. Distributions from 529 plans can lower financial aid eligibility, so holding off on using these funds until non-assessable years (Junior and Senior years) is ideal. Likewise, distributions from 529s held by grandparents should also be delayed until the later college years, since they are considered the child’s income under the formulas. If grandparents want to contribute in the early college years, we suggest transferring the 529 or other assets to the parents, or paying for items directly like computers or airline tickets. Another strategy is for grandparents to simply to make student loan payments later down the line.
Various actions by divorcees can have unintended consequences on financial aid eligibility. Selling the family home can reclassify non-assessable home equity as assessable cash. If the custodial parent gets remarried, the new spouse’s assets and income now become scrutinized by the FAFSA, and could lower your financial aid eligibility. If the custodial parent has an interest in taking classes at a local community college, one strategy could be to enroll at a local community college. Doing so will increase college financial aid eligibility, since the EFC formula is now divided by more “students” under this strategy.
Planning to Wealth sat down with Richard Romeo, a litigation attorney with a specialty in employment law, to answer top employment questions for business owners. Romeo practices at Salon Marrow, a boutique firm in Midtown Manhattan, and works with small to medium-sized businesses ranging from tech startups to large financial institutions. Discover Richard’s top tips for business owners to avoid liability and maintain workplace harmony.
1. Understand the Three Sets of Employment Law.
There are three sets of employment laws for business owners in New York City: Federal, State and New York City. If you are located in Westchester County, Nassau County, or Bergen County in New Jersey there may be laws in those particular counties to keep in mind. It’s important to make sure that you comply with all applicable laws and understand the nuances and details in these laws to have clear guidelines on what your business can and cannot do.
For instance, in New York City it’s important to know what types of questions you can ask potential employees. You can ask an interviewee about a conviction in New York State, but you can't use that conviction in the hiring process unless it relates to the job. Let’s say you are hiring someone as a school bus driver, and they were arrested for fraud and embezzlement. As long as they don't have any access to money, you might have a problem denying that person the school bus job even though they have a prior conviction. That might not be the case if that prior conviction was for sexual offenses against children.
It’s so important that business owners are aware of the details and nuances of these laws, especially at a small to midsize company that is aggressively growing. One lawsuit can really make or break a company’s future.
2. Be Aware of the Fair Labor Standards Act (FLSA).
Among other things, FLSA requires that employers pay a minimum hourly wage. The Act states that except for “exempt” employees, all employees must be paid time and a half for any hours worked in excess of 40 hours in any given week. However, it’s important to note there are a lot of exemptions (executives, sales people, etc.) and there’s a lot of details relating to these exemptions. FLSA is Federal Law. The New York labor law has similar provisions, and it’s important to know the key differences. For example, New York minimum wage is higher than the Federal minimum wage. There are a surprisingly large number of established businesses that don’t clearly understand the key differences in labor laws, which puts the company’s financial success at risk.
How can you avoid an FLSA violation?
1) Properly classify the employee as exempt or non-exempt.
2) Keep accurate records of how many hours they work.
3) Make proper calculations for overtime.
3. Know the Proper Protocol for Terminating Employees.
One of the largest problems for companies is building proper policies on disciplining and terminating employees as well as following the policies put in place. For instance, if a business owner terminates someone because of “poor performance”, the first thing a court or administrative agency will ask is, “How did he or she not perform?” To bust any claims of false discrimination, the business owner should have memos with specificity detailing under-performance.
To ensure your business has clear guidelines for employee performance, leave no room for debate. You should document policies that cover all expectations of employees, even common sense protocol like coming to work on time.
4. Ensure your Employee Manual includes Standards of Conduct and Rules Regarding Leave.
There are many rules regarding leave that employers need to document. A major one is The Family Medical Leave Act (FMLA), which is a Federal law that guarantees certain employees up to 12 workweeks of unpaid leave each year with no threat of job loss. FMLA also requires that employers covered by the law maintain the health benefits for eligible workers who are on leave just as if they were working.
In New York State, business owners also need to address the Paid Benefits Leave Act, which provides paid leave to bond with a new child, care for a loved one with a serious health condition, or to help relieve family pressures when someone is called to active military service abroad. As well, in New York City the Earned Sick Time Act also mandates that certain kinds of leave is paid.
It’s important that you document all of these laws in your employee manual and clearly define the different requirements for each law. New York City is especially vigorous in enforcing these regulations, so if your business is located in New York City, it’s even more vital to consult your lawyer.
5. Make Sexual Harassment Policies a Priority.
Starting October 9, 2018, employers in New York State are now required to adopt the state’s model sexual harassment prevention policy or modify an existing sexual harassment policy to meet the state’s minimum standards, and provide annual sexual harassment prevention training to all employees.
This will help ensure all employees are in a safe and stress-free environment, and help avoid improper conduct in the workplace.
As 2018 comes to a close, it’s an important time to revisit your financials to maximize savings, ensure you start the new year strong and to stay on track to accomplish your goals. From tax managing your investments to executing your charitable gifting strategy, here are some checklist financial planning items you might want to consider as you get ready for 2019:
Tax Manage your Investments.
Tax loss harvesting. Look to sell losing investment positions to offset capital gains. Be aware of the wash sale rules.
Coordinate tax-aware rebalancing of your portfolio. With the markets up substantially over the last several years, you’ll probably want to bring your asset allocation to their target weights, but you might want to delay taking those large gains until January so you can delay paying the taxes another 12 months.
Optimize income and expenses. If possible, delay the receipt of end of year bonuses into 2019 and accelerate expenses into 2018 to potentially lower your 2018 tax bill.
Watch out for mutual fund distributions. Mutual funds distribute capital gains distributions toward the end of the year. If you’re buying into a fund late in the year, check to see if they’ve already made the distribution. You don’t want to essentially buy someone else’s large capital gains distributions.
Max out contributions. If possible, ensure that you max out contributionsto 401Ks, IRAs (not due until April 15th), SEPs (due April 15th or extension deadline), Simple IRAs (April 15th deadline) or other qualified accounts.
Consider a Roth conversion. With a Roth conversion (December 31st deadline), you’ll convert pre-tax IRA money into nontaxable Roth IRA money. You’ll be taxed on the conversion amount as ordinary income, but all future gains and distributions within the limitations won’t be taxed. This makes the most sense to do if you’ve had a down year income wise. Also, unlike in previous years, you can’t change your mind and reverse the Roth conversion through a Roth re-characterization due to Tax Cuts and Jobs Act (TCJA).
Review the Basics and Tidy Up your Accounts.
Review health savings accounts (HSA) contributions. You have until the April tax deadline to make an HSA contribution. If you don’t have an HSA, we’d strongly encourage you to explore if you’re eligible, given the account’s triple tax benefits.
Spend Flexible Savings Account (FSA) remaining balances. If you don’t use the money in the account by December 31st, you lose out on the opportunity to spend that money.
Update your beneficiaries on your retirement accounts and insurance policies. Failing to update beneficiaries can be one of the biggest financial and estate planning blunders one can make. If there’s been a change in your circumstances, it’s important to address this.
Make annual gifts to reduce the size of your estate. The annual gift tax exclusion is $15,000 for 2018.
Execute your Charitable Gifting Strategy.
Donate to a Donor Advised Fund (DAF). With the TCJA’s higher standard deduction, fewer people will be itemizing. You may want to consider donating to a donor-advised fund (DAF) in 2018 the next several years of expected charitable contributions. The DAF will let you make the contributions to the charity over time, but you can take the deduction immediately.
Choose how you fund charitable gifts wisely. If you’re making a charitable contribution, it’s preferable tax-wise to donate low basis stock to a charity or donor-advised fund as opposed to selling positions and giving cash.
Consider a Qualified Charitable Distribution (QCD). Another way to minimize your tax burden for those that may not be able to itemize anymore and are over 70.5, is to take a QCD, which is a direct distribution under $100,000 from an IRA to a charity. The QCD counts toward the RMD and reduces the tax burden of your distribution.
Be Mindful of Age Milestones.
Over 50: You are now eligible to take a “catch-up contribution” to your IRAs and some qualified plans (401K, etc.).
Over 55: You are now eligible to take certain types of distributions from your old 401Ks without penalty.
Over 59.5: You are now eligible to take an IRA distribution without a 10% penalty.
Over 62: You are now eligible for Social Security.
Over 65: You are now eligible for Medicare.
Over 70.5: Don’t forget to take your required minimum distributions (RMDs) on your IRA accounts. There’s a massive 50% penalty if you fail to take the RMD.
Open New Accounts for your Children or Grandchildren to Maximize Savings.
Open Roth IRA or traditional IRA accounts for children or grandchildren who have had earned income. Child IRA assets are non-assessable in the FAFSA for student aid eligibility. You don’t necessarily have to put the money they’ve earned into the Roth IRA or IRA, you can let them spend the money they’ve made and then redirect other money that’s going toward college savings into a Roth IRA.
Consider 529 contributions for your children, grandchildren or yourself. If you already have children, opening a 529 is simply a must to begin saving for those college years. People without children can also open 529s for themselves and change the beneficiary once they have children. This maximizes the amount of time of tax-free compounding in the accounts.
The startup environment is one of the most sought after work cultures today. With more and more people taking a different approach to building their careers breaking the mold from previous “9-5” generations, startup employees are often chasing their passions and looking to change the world. Yet, the reward of this risk is often uncertain, and working at a startup presents unique opportunities and challenges.
While there is huge upside to a startup becoming successful, startup employees typically work long hours, have a below market salary, and have no clearly defined career roadmap-making navigating a startup career sometimes difficult. If you’ve recently started a position at a startup or are simply considering moving into the startup career path, read on for top tips to achieve success.
1. Live below your means and keep debt low. While this is an important rule of thumb for any career, it’s even more relevant to startup employees given the uncertain financial future of most startups, and that most startups are located in high cost of living cities like San Francisco, New York, and Boston.
Living below your means allows you to stay at the startup longer if you have a below-market salary. To live below your means, it’s important to keep your fixed expenses low. If the general rule of thumb is that no more than 30% of your salary should go towards housing, for startup employees, it’s smart to keep housing expenses below 20% of your overall income.
If you have the means to buy a home, you may want to consider putting more down to lower your risk and lower your monthly payments.
Overall, the more you live below your means, the more you can pay down debt resulting in less stress and a stronger financial future. It also allows you to have a cushion to build an emergency fund, a crucial element in preparing for life’s unexpected turns.
2. Build that emergency fund. While most startup employees have skill sets that are highly valued in the job market, you are going to need an emergency fund in case your startup loses momentum and runs out of funding.
If your startup doesn’t succeed, your emergency fund will help you pay for regular living expenses, and other living costs that will no longer be covered by your job like health care. While startups have some of the best perks like free lunch and free gym memberships, these are expenses you will have to consider in your emergency fund while you job hunt for your next opportunity. If you’re struggling to build your emergency fund, consider using an app like Digit or Qapital to make saving easier. Here’s some guidelines and details on planning for an emergency fund.
3. Consider life insurance and disability outside the company. While some startups may offer life insurance and disability insurance, it’s important to consider getting coverage if your startup doesn’t offer it. For people without dependents, disability would be a higher priority than life insurance, since for most young professionals, the ability to earn income is your most valuable asset. If you have kids, you might want to consider term life insurance that would pay out a lump sum to provide for your dependents if you were to unexpectedly pass away. Term life insurance gives a specified death benefit only for a specific period (i.e. 20 years or 30 years). The annual premiums are much lower for term life insurance than whole life insurance, which gives a death benefit as long as you keep paying the premiums. Whole life insurance is probably too much of an expense for most startup employees since sometimes it can cost 10x term insurance, depending on your age, health and gender.
4. Get up to speed on equity compensation. Equity is one of the biggest perks of joining a startup. However, oftentimes, startup employees are not entirely clear on what their equity means. In light of this, it’s extremely important to get to know the ins and outs of your equity compensation including how and when your equity vests and if there is a holding period if the company goes public.
You should also explore what happens to your equity in different circumstances, such as if you decide to leave the company, get laid off or if the company is acquired. With equity being such an alluring part of startup employee compensation, it’s important to fully understand how it can impact your financial future.
A common oversight for many startup employees is not saving enough to pay for exercising their vested company stock options when they leave the startup. When you leave your startup you may need to pay anywhere between $5,000 and $20,000 within 30 to 90 days to exercise your stock options, depending on what your employment and equity award contracts specify.
5. Don’t consider your equity part of your retirement plan. While it may seem like equity can play a role in retirement planning, there are countless startups that don’t ever have a liquidity event. It’s important to note that equity can be diluted, exit events are rare, and you could leave the company before your equity even vests. In most cases, employees get common stock, which means investors get their money back first before employees receive any payout.
To be safe, you should be saving money from your regular salary and investing in a 401(k) and/or other savings vehicles in case there isn’t a liquidity event.
6. Be skeptical of crowd-sourced financial advice. We’ve met countless startup employees that have moved forward with some of the biggest financial decisions of their lives (the size of the home to buy, the timing of options exercise, etc.) basing their decision on polling colleagues on Slack channels. While startups are filled with many smart people that are financially savvy and willing to offer advice to help colleagues, it’s important to do your own research and perhaps talk to a professional financial planner when it comes to major life decisions.
7. Maximize your tax deductions by contributing to a 401(k) and Health Savings Account (HSA).
More and more startups are offering 401(k) plans, and in 2018 you can contribute up to $18,500 towards retirement in one. Not only will you be building your nest egg, but you’ll lower your taxes since contributions reduce your taxable income dollar for dollar.
As well, one of the smartest way to save money tax-free is with a Health Savings Account (HSA). A Health Savings Account gives you a triple-tax advantage: contributions are a tax deduction, your investment grows tax-free rolling over year-to-year, and distributions for qualified health expenses are not taxed. If your startup doesn’t offer an HSA, you can get it through an independent provider and walk away with a useful asset if your company goes down.
If you decide not to use the HSA funds on health care expenses, you can to roll the HSA into an IRA after age 65. Learn more about the benefits of a Health Savings Account.
8. Work with a CPA and employment attorney that knows your situation well and can advocate for you. As you think about when you’ll exercise your stock options, how many of them you should exercise, and/or if you should take the 83B election, you’re going to need a good CPA to help you understand and minimize the tax implications. Likewise, it rarely makes sense to negotiate the details of an employment agreement without an employment attorney at your side. Many mistakenly go it alone when they negotiate the document that will potentially dictate their financial future over the course of several years.
9. Invest your money wisely. Overall, you want to make sure that the money you are saving is growing over time. To successfully achieve this, your investments should be diversified, you should be taking an appropriate amount of risk, and as mentioned earlier, you should keep expenses low.
If you don’t need one-to-one, personalized financial planning advice, consider platforms like Betterment or Wealthfront, which create low-cost portfolios based on your risk profile. If you do work with a financial advisor, the advisor would ideally be a fee-based fiduciary that can provide you objective advice and guidance at a reasonable cost. Here’s some information on evaluating a financial advisor.
David Wilson, CFP®, CFA, CDFA®, CCFC is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Senior Wealth Advisor at Watts Capital. He can be reached at firstname.lastname@example.org.
As a Peruvian expat living in New York City, friends and family are always telling me that they want to go to Peru and visit many of the popular tourist destinations my country has to offer, such as Machu Picchu, the Nazca Lines, and Lake Titicaca. They want to land in Lima, Peru’s capital and entry point for most flights, and board the next plane for their final destination. To them I say, “Great! But, what about staying in Lima a few more days and experiencing a totally different, less touristy leg of the trip?” With that in mind, I give you my top 5 musts for when you are in Lima, Peru.
1. Experience the up and coming Barranco.
The district is considered one of the most romantic and bohemian areas of Lima. Many equate it to New York City’s Brooklyn. Filled with bars, restaurants, art galleries, and museums depicting beautiful colonial and pre-colonial art, this area of the city is bursting at the seams with things to explore. You can shop for some artisanal items in Dedalo, explore the beautiful colonial-style churches and plazas, or walk along the historical “Puente de los suspiros.”
2. Rent a bike and ride through El Malecon de Miraflores.
This six-mile stretch of parks is situated along the cliffs that overlook the Pacific Ocean. Every time I go to Lima I always end up walking, running, or sometimes biking through the Malecon. Recently, many of the locals have opted for a bike ride through the Malecon as a faster, more enjoyable commute to and from work. I personally think the traffic in Lima is unbearable and the driving is slightly erratic and avoid it at all costs. Even if you are not commuting to or from work, this area is still a must. The views of the city are incredible and the sunsets are like no other. If you are feeling particularly adventurous, there is an area nearby from which you can parasail, which will take you off the cliff directly to the beach below.
3. Food, food, and more food.
Peruvian cuisine has gained significant attention from around the world and part of the reason is, well, because it’s just amazing. Gaston Acurio has several top of the line restaurants. One of my favorites is La Mar, a seafood restaurant, with some of the best ceviche around. Wash your meal down with some Chicha Morada (a popular non-alcoholic drink made from purple corn), Inka Cola (Peru’s favorite soda), or Pisco Sour (our national cocktail). You won’t be disappointed. A newer restaurant is Isolina. I had the pleasure of having lunch there with a few friends the last time I was in Lima. The wait was about an hour, but absolutely worth it. Two of the more popular plates are “Costilla de cerdo a la Chorrillana” and the “Lomo Saltado.”
4. People watch in a plaza called Dasso.
There’s a dinky little plaza in the area of San Isidro called Dasso that is surrounded by a variety of coffee shops. The one thing they all have in common is that during the mornings, noon, and later in the day, you will find the residents of San Isidro sipping their coffee, having business meetings, and people watching. I usually go to Delicass— but that’s just because it's one of the originals. Some other spots worth checking out are Bottega Dasso, Havana Cafe, and El Pan de la Chola, which translates to “bread of the Chola” and is incredibly popular among locals.
5. Enjoy the beach.
Lima is situated on the western coast of Peru and is lined with beaches, both public and private. The beach directly below El Malecon de Miraflores (the coastal park I mentioned before) is called Costa Verde de Chorrillos. It’s named that way because back in the day the cliff was covered in green vegetation. Unfortunately, that’s no longer the case as Lima has become so arid that the cliff is mainly sand now. The ocean here tends to be on the calmer side, but if you are lucky, you might be able to get some surf. Usually, there’s some people renting out boards and wetsuits for a few bucks.
Born and raised in Peru, Nico Pinto is a Wealth Advisor at Watts Capital in New York City. Nico and his wife live in Brooklyn, where they enjoy discovering new restaurants, and making occasional trips out to the beach to surf.
With the S&P 500 near all-time highs and the bull market being the longest in history, many investors are anxious and looking for ways to protect themselves for a potential upcoming bear market. High quality bonds have historically provided a natural hedge for a market sell off with the Barclays Aggregate Bond Index producing positive returns in each of the S&P 500's 6 negative calendar years since 1980. The bond index was even up 5.2% in 2008 while the S&P 500 sold off 37% due to the housing/credit crisis. With interest rates on the rise and inflation creeping into the economy, many investors are looking at other potential safe haven investments to help weather the next bear market. Is allocating more capital to residential real estate the best path to avert a potential bear market?
Real Estate in Bear Markets. How residential real estate has performed historically versus the stock market in different periods can give us some clues as to whether real estate will help during the next bear market. Planning to Wealth looked at residential real estate as opposed to publicly traded real estate, since returns for publicly traded real estate investments like Real Estate Investment Trusts (REITs) are more correlated to the stock markets than actual real estate. During the eight bear markets since 1960, the Case-Schiller Home Price Index only had negative returns during one bear market period: the 2007-2009 housing/credit crisis. It’s interesting to note that home prices even went up during periods of high inflation, like the 1980-1982 bear market and 1973-1974 bear market, when the Consumer Price Index (CPI) went up 14% and 20%, respectively.
Stock Market Versus Real Estate Returns. Over long periods of time, home prices have tended to follow a relatively predictable return pattern of increasing about 1% more per year than CPI with the Case-Schiller returning 4.1% annually since 1980 versus 3.1% for CPI. While the stock market has done much better returning 8.7% per year since 1980, its performance has varied dramatically. The annual return for the S&P 500 was 4.4%, 1.7%, 12.5%, 15.1%, and -2.5% in the 1970’s, 1980’s, 1990’s and 2000’s, versus annual home price growth of 8.7%, 5.9%, 2.7%, and 3.9%. Home price growth has had significantly lower standard deviation of returns with the Case-Shiller having less than 20% of the standard deviation of the S&P 500.
Problems with the Historical Data. While the data shows us that real estate still performs well in stock bear markets and has less volatility of returns, drawing conclusions from S&P 500 and Case-Schiller Home Index presents some issues though. The housing return data doesn’t include rent on a home, so total return comparisons between the S&P 500 and Case-Shiller aren’t apples to apples.
Real Estate Volatility. As well, real estate’s low return volatility properties may be overstated. We would argue that real estate’s higher transaction costs and the period of time it takes to convert a property into cash contributes to the lower volatility we see in the data. Since buying and selling real estate costs so much in terms of time and transaction costs, investors don’t trade as often as stock investors do, and real estate investors are less likely to engage in irrational and impulsive buy and sell decisions than stock investors.
Stock investors have the ability to sell their securities with the click of a button and at the cost of a few dollars, therefore stock investors can more easily fall victim to behavioral finance tendencies that lead investors to invest emotionally by buying at market tops due to greed, or selling at the market bottoms due to fear. This emotion driven market timing causes investors to dramatically underperform the indexes, as the 2017 Dalbar study concluded that equity investors underperform stock indexes by 2.9% annually over a 20-year period. If we were able to buy and sell individual real estate properties on a public exchange without high transaction costs, we’d argue that you’d see much higher volatility in returns.
Price Anchoring. Moreover, we are skeptical of the return data for the real estate indexes over short periods. For example, there’s a tendency for some investors that may want to sell in a down market to “anchor” the price they want to sell at above their original purchase price. They try to avoid “taking a loss” by delaying selling until the recessionary period is over when they are more likely to sell their property above what they bought it at. This can create an artificial floor in real estate prices and skew the return data. Since the Schiller-Case data is based on only actual sales, a real estate downturn and lower housing demand will not show up in the data unless a sale is actually made. Anecdotally, we hear with greater frequency real estate investors wanting to wait until the market goes back up to sell a home, than stock investors waiting for a change in the market to sell their stock positions.
Scenarios When Real Estate and Bear Markets Work Best. While we don’t believe real estate overall will sidestep an entire bear market, real estate investing can definitely benefit many investors during a prolonged bear market under certain scenarios. If a bear market coincides with a period of a high inflation, like it did in the 1970’s, real estate is probably a good bet. Bonds, what most people use as a hedge against a bear market, performed very poorly during the 1970’s. As well, if you’re the type of person that will react emotionally during a market downturn, resulting in poor market timing and underperformance, then real estate may make sense for you. The high transaction costs and barriers to selling would help you stay invested and help you earn better returns over the long run.
Maximizing your Real Estate Returns. When it comes to real estate investing, it’s important to really articulate your investment thesis and understand the competitive advantage you have to execute that investment thesis. There are a lot of ways to make money in real estate, and we’ve found that the most successful investors know what their edge is and maximize it. For some investors, their edge could be a lower cost of financing, while for others it could be the ability to identify areas with surging demographic trends before other investors drive up prices. For example, your investment thesis may be investing to take advantage of positive demographic trends: an area with a lot of new businesses starting and job creation can help the real estate market in the short and long term. Markets like Denver, Nashville and Austin come to mind. And while real estate has performed well during recessions in the past, prices and valuation matter. The Case-Shiller Home Index is now 10% higher than its pre housing-crisis peak in July 2006, so finding a property that has good growth potential and a high level of income relative to price is increasingly important at market peaks like this.
Location. Location. Location. We must keep in mind that real estate performance is local, so it can be difficult to forecast overall trends and returns for real estate. There’s wide dispersion for real estate returns, depending on the area, property type, neighborhood, etc. For example, the DC residential real estate market continued to expand in the years after the 2008 financial crisis due to massive government spending and strong job growth in the government sector. On the other hand, the Miami condo market contracted sharply during this time. Property types react very differently to a bear market. For example, vacation homes and the ultra luxury sectors are likely to contract greater than the typical residential property. A shrewd real estate investor can increase his or her chances of side stepping a bear market by picking the right properties.
A Word of Caution. Before doing something drastic to your financial planning, like re-allocating the bulk of your investment portfolio into real estate to try and time the next bear market, it’s important to recognize that market corrections and bear markets are normal. There have been 29 market corrections (declines of 10%) and bear markets (declines of 20%) since 1960. In other words, we can expect a 10% selloff every 2.8 years and a 20% selloff every 7.3 years, historically. And while we’ve had five market corrections since the last bear market of 2007 to 2009, bear markets should not be overly feared. The patient investor will continue to make money in the market over long periods of time. For example, the S&P 500 is up around 70% since its peak in October 2007, right before the market went into a 517-day bear market. The key is that patience is a better indicator of stock market success than market timing.
David Flores Wilson, CFP®, CFA, CDFA®, CCFC is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Wealth Advisor at Watts Capital. He can be reached at email@example.com.
Finding the right amount of space, the ideal location, and an inspiring aesthetic to keep employees motivated can be a tall order when hunting for office space in Manhattan. Planning to Wealth sat down with Paul Sosa, a commercial real estate expert with Redwood Property Group, to answer top questions from business owners looking to move office locations and ready for a change of scenery.
1. What’s the Manhattan office leasing market look like right now?
The office market is slower compared to last year, and there's approximately 12% of office space available now in Manhattan. The most active tenants are in the Financial Services, Insurance, and Real Estate (FIRE) industries, followed by the Technology, Advertising, Media, and Information (TAMI) sectors.
2. What areas of Manhattan are hot right now? Which areas are stagnant? What do prices look like?
The hottest locations are Midtown, Union Square, Financial District, and areas near subway stops and massive public transportation hubs like Plaza District, Grand Central, Times Square, and Penn Station. The stagnant locations are locations far from subways, like the most eastern or western edges of Manhattan.
The average Manhattan asking price is about $72 per square foot per year. However, prices vary a lot between Midtown ($77 per square foot), Midtown South ($79 per square foot), and downtown ($61 per square foot). Office space also varies greatly by building type, such as class A buildings ($60 and up), class B buildings ($48-$60), and class C buildings ($35-$50).
When evaluating pricing, it’s important to prioritize either location or building class. For instance, you could get a Financial District class A office space at the price of a Midtown class B office space rate.
3. What are some things business owners should be aware of when starting to look for office space?
Business owners should get familiar with the market and understand approximately how much square footage would fit their needs. If they need to relocate, they should look at all the move-out provisions they have signed in their current lease to make sure they won't have unexpected move out expenses.
4. How should business owners get ready to look for space?
Preparation is key. Business owners should have all of the financials organized, as well as enough funds for first month's rent and three to four months of the security deposit. They should prepare for expenses like moving, insurance, office furniture, and also have additional funds in reserve to illustrates their financial strength to a potential landlord. If not, the landlord may reject your application or may ask for a larger security deposit. A business owner should also think through in advance what type of office layout works best for the company based on their needs.
5. What are some mistakes business owners make when looking for space?
Many business owners waste their precious time searching and visiting all the wrong locations or contacting multiple brokers, which results in many of these brokers showing the spaces the owner has previously seen. My advice is to hire an experienced commercial leasing agent that knows the market inside and out and will provide all the necessary supporting information about any desired space.
6. What are some things business owners should be aware of when negotiating with a landlord?
Make sure they negotiate everything that is open for negotiation, including the rent rate, security deposit, months concession, term, increases, landlord’s build-out, tenant’s requirements, business hours, building charges, etc.
7. What provisions are most important in the lease document?
In my opinion, the most important provisions are the restoration provisions, holdover provisions, good guy clause or guarantee, lease extension options, and the landlord’s right to show.
8. What are some mistakes business owners make when negotiating with landlords?
Landlords know their leases well, they negotiate them all the time, and of course, they are always looking to maximize profits. One of the major mistakes I see is business owners not hiring a commercial real estate attorney to review leases to make sure that all the negotiated terms are included in the lease. There can sometimes be additional landlord profit centers in the lease that were never discussed. Overall, an attorney can help add things like a “good guy clause” contingency.
9. When should a business owner consider getting dedicated space over a co-working space? When does co-working space make more sense?
Co-working space makes sense if you’re starting a new business, or you are a small business with five employees or less and you are not sure if you are going to grow. Rents are around $140 per square feet, they have flexible month to month terms, and they include office desk services and amenities.
Once you see that you are growing your business above five employees, then it probably makes sense to get a direct lease. Asking rents can be as low as $35 per square foot and up -- it all depends on the types of business and the requirements you need for your business.
David Flores Wilson, CFP®, CFA, CDFA®, CCFC is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Wealth Advisor at Watts Capital. He can be reached at firstname.lastname@example.org.
While Dave Packard’s famous quote “more companies die from indigestion than starvation,” may or may not have rigorous data or research behind it, the point is still valid: growing your business too fast can have serious negative consequences.
To understand more about how growing companies can avoid the potential pitfalls of hyper-fast growth, Planning to Wealth talked to Deep Gujral, a New York City-based accounting expert that works with high-growth startups and businesses. Gujral, Principal of Withum’s Technology Advisory Practice, has advised over 300 venture capital backed growth companies since leaving his position as the Director of Finance at an enterprise SaaS company in 2011. Here are his top tips for business owners and founders looking to grow and scale their business.
1. Build accounting procedures that prepare you for rapid growth.
Most of my clients are venture-backed companies in a rapid growth stage. If during rapid growth the company doesn’t have good processes and functions, a lot of things will slip through the cracks. For example, if an eCommerce platform or SaaS platform starts getting significantly more orders and closing bigger deals, a lack of process could mean missing invoices, gaps in procedures that lead to lost revenue, and the company can lose track of returned goods resulting in inaccurate inventory.
A lot of the things that were done while bootstrapping the company won’t work during rapid growth. For example, tracking inventory in a spreadsheet. What a company doesn’t realize is that when revenues double or triple, that same process will break. Just doing it on a smaller scale won’t work on a larger scale and you never want the accounting and finance function to be the Achilles heel of the organization.
2. Set up the right metrics and KPIs (key performance indicators) for measuring success and making quick business decisions.
Oftentimes a founder doesn’t have a lot of insight into his or her own business. In light of this, standard KPIs and metrics aren’t set up to measure success such as order volume, how profitable each client is, or even a record of how long they’ve had each client. Figuring out the fundamental metrics for your business and how you get that out of the finance and accounting system is key. We’ve seen enterprise software clients grow so quickly that they’ve missed invoicing new clients that have gone through onboarding. There are compliance issues related to different states and sales tax issues as you grow in different states and foreign countries.
We also frequently find that clients don’t fully understand unit profitability and/or they don’t have very clear financials so they can’t make quick decisions. The lack of data often limits company growth and gives no clear answers to questions like: How many employees should I hire? What’s the projected profitability by third quarter if we hit a certain sales number? What resources would we need if we scale and who do we hire when we hire that person? The financials directly affect real business issues and decision making.
3. Use an actual ledger-based accounting software like QuickBooks online or Xero, don’t try to put all your numbers in a spreadsheet.
Different software packages are right for different kinds of businesses. These systems can go a long way in ensuring that accounting and invoicing procedures are scalable and serious revenues don’t get missed.
4. Store all your data in one centralized location and document your processes.
Invoices should be stored in one centralized cloud location. Don’t rely on paper. Document all your processes so procedures like how to invoice a customer can be shared with new employees as your company grows. Steps to consider in the process are: How do you receive payment? How do you make note of that payment? If you’re really building something that will scale, you’re not going to be the only one doing it. A lot of startups only have one person that knows how to do the billing, and they haven’t written it down, so if someone was handed that task they wouldn’t be able to do it.
5. Examine what the compliance issues are for your industry.
Oftentimes we work with a company that’s experiencing rapid growth, they’ve raised a lot of capital, and what comes back to haunt them are compliance issues. For instance, it’s important to make sure you are compliant with all local and state tax laws, or human resource rules and hiring requirements. Other common compliance issues are ensuring your company is compliant with contractor versus employee rules, medical leave, as well as paternal and maternal leave.
6. Hire the right skill sets to offset your company’s weaknesses.
When you’re making your first hires, you want to hire people with skill sets that offset your weaknesses to create a strong and balanced team. It’s important to A) establish a formal human resources roadmap of all expected hires over the short-term and long-term; B) create detailed descriptions of each role and its purpose; C) establish metrics for success for people hired within each role; and D) implement an objective hiring process that includes skills-based testing, leadership potential assessment, and other role specific testing criteria. With this in place, employees will fully understand the responsibilities of their role and growth opportunities as the company scales.
David Flores Wilson, CFP®, CFA, CDFA®, CCFC is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Wealth Advisor at Watts Capital. He can be reached at email@example.com.